Trump Tariffs Are Making International Stock Markets Great Again

Yahoo

3 days ago

(Bloomberg) -- US President Donald Trump's tariffs are giving international stocks a serious lift and at the same time helping to end the S&P 500 Index's run of global dominance — at least for now.
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International stock markets are on pace to outperform the broad US equities benchmark this year, the first time they've done that since 2022, and the first time in a rising market since 2009. Fears that tariffs and trade uncertainty will have an outsized impact on Corporate America's earnings growth are the primary culprit.
The MSCI World Index excluding the US is clobbering the S&P 500 in 2025, jumping 18% thus far versus a more modest 7.8% gain in the S&P 500. You can see why in the individual performances. Mexico's key stock market index is up 18% this year, Canada's is up 12%, Germany's 21%, Spain's 26%, Brazil's 14%, and the UK's 11%.
It's a sharp reversal from years of soaring gains for US equities, spurred most recently by mega-cap technology companies and the promise of artificial intelligence, and relatively sluggish performances by their global peers. This has left stocks in markets outside of the US relatively cheap.
'Sometimes the biggest gains come from the fixer-upper opportunities,' Craig Basinger, chief strategist at Purpose Investments Inc, said in an interview.
The valuation gap between US and international markets is 'historically wide,' and investors are largely over-invested in the US and under-invested in other markets, according to Basinger. That trend has been reversing this year, and it could accelerate as Trump's tariffs come into effect this month, while trading partners in Canada, Europe, Japan and elsewhere embark on investor-friendly reforms and boost domestic growth, he said.
'Rate of change matters in markets, and it would appear that international markets, generally speaking, are becoming a bit more investor friendly,' Basinger said. 'America is still the gold standard, but if the gap narrows, so could the valuation gap.'
An 'ultra-low growth' earnings outlook that has been baked into European and Japanese stocks for years also is starting to change, according to David Lambert, managing director, senior portfolio manager and head of European equities at RBC Global Asset Management.
'We're actually in an era now where earnings growth could be incrementally higher for the medium term,' Lambert said. 'There's no reason why you can't see a gentle rerating in the coming years even further from where we are today.'
He's not alone in that opinion. A June survey by BofA Securities found that 54% of the fund managers who responded expect international stocks to be the best-performing asset in the next five years. Just 23% held that view on US equities.
The reason is Trump's tariffs, which are expected to hit Corporate America's earnings harder than companies in Europe or Japan, said David Groman, a director on Citi Research's global equity strategy team. Europe in particular is leading in value and momentum performance, according to a Citi note to clients on Wednesday.
'There is more clarity and investors have this ability to at least pencil in what they think the earnings impact will be in a place like Europe or Japan,' Groman said in an interview. Markets like Europe have already priced in a bad outcome on tariffs, and it may actually turn out to be better than expected, he added.
To be sure, some strategists see pain in the US potentially spilling over into other markets around the world. Emily Roland and Matthew Miskin, co-chief investment strategists at Manulife John Hancock, caution against holding low-quality, cyclical international stocks in this kind of environment.
'Every other time in history if the US sees a recession, it has brought the rest of the world down with it,' they wrote in a recent note to clients.
Still, the rotation from US stocks and into international equities could end up being 'a very long' story, Purpose's Basinger said.
'People just have too much US right now,' he said.
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